Lowe's Dividend Is Safe

As a dividend investor, it pays to follow how much of a company's money goes toward funding its dividend. A nice yield now won't matter much if the company can't keep making those payments going forward.

Here, we'll highlight a given company and its closest competitors to see just how safe their dividends are, with a little help from three crucial tools:

• The interest coverage ratio, or earnings before interest and taxes, divided by interest expense. The interest coverage ratio measures a company's ability to pay the interest on its debt. An interest coverage ratio less than 1.5 is questionable; a number less than 1 means that the company is not bringing in enough money to cover its interest expenses.
• The EPS payout ratio, or dividends per share divided by earnings per share. The EPS payout ratio measures the percentage of earnings that go toward paying the dividend. A ratio greater than 80% is worrisome.
• The FCF payout ratio, or dividends per share divided by free cash flow per share. Earnings alone don't always paint a complete picture of a business's health. The FCF payout ratio measures the percent of free cash flow devoted toward paying the dividend. Again, a ratio greater than 80% could be a red flag.

Each of these ratios reflects dividends paid in the trailing 12 months, while yields are the expected forward yield. Let's examine Lowe's (NYSE: LOW  ) and three of its peers.

Company	Yield	Interest Coverage	EPS Payout Ratio	FCF Payout Ratio
Lowe's Companies	2.6%	10.3	32.2%	22.1%
The Home Depot (NYSE: HD  )	2.8%	11.8	44.4%	36.2%
Wal-Mart Stores (NYSE: WMT  )	2.6%	11.2	28.4%	75.4%
Tractor Supply (Nasdaq: TSCO  )	0.7%	184.7	14%	395.4%

Source: S&P Capital IQ.

With an interest coverage of 10.3, Lowe's covers every $1 in interest expenses with $10 in operating earnings. Given that its EPS payout ratio and FCF payout ratio are below 35%, you shouldn't have to worry that Lowe's will need to cut its dividend anytime soon.

Another tool for better investing
Most investors don't keep tabs on their companies. That's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. We can help you keep tabs on your companies with My Watchlist, our free, personalized stock-tracking service.

• Add Lowe's Companies to My Watchlist.
• Add The Home Depot to My Watchlist.
• Add Wal-Mart Stores to My Watchlist.
• Add Tractor Supply to My Watchlist.